Build A ‘Whatever Happens’ Portfolio Now [Whole Foods Market, Inc., Duke Energy Corp, Pfizer Inc.]

Wall streetJoseph L. Shaefer: I sent a note to our clients earlier today that I think may have value for our loyal readers here, as well. I will share my comments to them, but also remind you of the specific funds, ETFs and individual securities we have previously discussed that may be of value in your own investing.

There is no such thing as a “defensive” portfolio of long-only stocks. Stockbrokers who must always keep something new ready to sell will cite utilities, health care and consumer staples as stocks to rotate into to protect against a market crash. Their logic sounds good: “People gotta eat, take their drugs and pay their electric and gas bill, no matter how tough things get.”

True – as far as it goes. People gotta eat. But investors don’t have to pay 60 times earnings for Chipotle (NYSE:CMG) or 25 times earnings for Whole Foods Market (NASDAQ:WFM). The earnings for those two companies (or Procter & Gamble (NYSE:PG) or Pfizer (NYSE:PFE) or Duke Power (NYSE:DUK), et al) might continue unabated, but if their P/E falls by half, their stock still falls by half. Are you willing to accept a 50% drop in the value of your portfolio in a correction, smug in the knowledge that you switched to “defensive” stocks?

Me neither. That’s why we have built a very diverse portfolio of mutual funds, closed-end funds, ETFs and individual stocks.

For those who have forgotten what declines look like (or have chosen not to remember 2008, 2000, or a number of more distant spells of vertigo) there is no long position in stocks that will protect you. Blue chips will not. They fall just like everything else. Dividend Aristocrats will not. They, like blue chips, are a good long-term strategy, but they offer no protection against a down market.

Gold is iffy. If the reason for the slide is runaway inflation or terrifying world-altering geopolitical events, gold is a haven. But for a decline because, say, the market is simply way overvalued and new buyers are too scared to enter, gold declines with everything else.

Buy and hold will do what buy and hold has always done; allow you to reach the giddy heights of the top of the roller coaster before experiencing the fear (and financial loss) of the downhill slide. The same with index funds that are simply a static position.

There are, regrettably, only two positions (other than the hedges I discuss below) that will keep your profits intact: cash and bonds. Cash will lose its value at the rate of inflation – but then so will every long position. So if cash “loses” you 2% over the course of a year, that still beats stocks, which have declined 10% on paper — and 12% after allowing for the loss of purchasing power due to inflation. Remember that the next time some tout pushing his ideas on CNBC snorts that “cash is a loser because of inflation.” Duh – everything is a loser thanks to inflation, the silent tax.

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